Last week the National Audit Office (NAO), the UK’s public spending watchdog, published a report into local government financial sustainability. It found that despite additional funding being provided for local government between 2015 and 2024, this has not kept pace with the increasing demand for services. It concluded that short-term bailouts for distressed councils create long-term risks, and insufficient action has been taken to address the underlying weaknesses in local government financial sustainability.

Amidst these challenges, and with major reform to the funding system promised by the Labour Government, local authorities will find themselves under more pressure than ever to do what is in their power, with the tools they have, to improve their financial performance.

There are many possible ways to try and tackle this challenge, but they broadly fall into two categories: firstly, making cost and efficiency savings, and secondly, making better use of the assets at the authorities’ disposal to improve returns. Here we explore an example from each category which we may see local authorities undertaking to identify some key takeaways.

AI and digital transformation

The Government has put its full force behind the AI industry in recent weeks, with the publication of the AI Playbook following hot on the heels of the Government’s announcement that it will be adopting all 50 recommendations in its AI Opportunities Action Plan. A large part of the Government’s AI agenda is encouraging and turbo-charging adoption of AI throughout the public sector. The Government sees AI as a tool to deliver public services more effectively and efficiently than ever before. Together with the introduction of the Procurement Act 2023 on 24 February 2025, this creates a melting pot for the public sector to consider how to procure their technology services differently, more flexibly, and with the key aim of unlocking efficiencies. Whilst the next significant waves of AI adoption may be within central government and the NHS, clearly the intention is for implementation across most aspects of public life to improve the lives of all citizens.

Local government has been using targeted AI tools for a long time in areas such as public-facing chatbots in contact centres, image recognition to tackle fly-tipping/littering, Gen-AI tools for translation services and predictive analytics for homelessness prevention. Where local government is perhaps in its infancy is in the widespread adoption of Generative AI products. We expect to see some local authorities invest in AI to improve efficiency and reduce costs in back-office services, to help relieve the budgetary pressures they are under. The issue, unfortunately, will be that the savings payback on those investments will typically take 3-5 years to materialise, whereas many need cash savings and income generation now.

Gareth Oldale and Gemma Townley are partners in the government & public services team at the law firm TLT LLP, specialising in digital law and procurement.

Public sector real estate

Local authorities remain major land and real estate owners on behalf of their communities. Two methods that councils may adopt to bring in additional income include, firstly, running a capital assets disposal programme, though this is a short-term solution, and secondly, utilising real estate assets better to generate additional income through occupiers. The latter is not a quick or straightforward fix if the assets aren’t appropriate for the desired purpose. Nevertheless, in theory it could bring a council significant extra income.

For instance, there has been much discussion over recent years about high street retail buildings and offices owned by local authorities being repurposed via change of use for residential developments where there is a greater need and demand for that within the community. There are not yet many obvious examples of this strategy being deployed effectively and on a significant scale – i.e. enough to turn around the financial fortunes of a council – though we may see this change given the current policy environment around housing delivery.

Once again, this approach can require significant upfront investment which is clearly going to be challenging in some circumstances. The local asset backed vehicles (LABV) model was developed to improve returns for councils from development on land that they owned, however the procurement of a partner alone takes years and increasingly the private sector is looking for Local Authority investment beyond the land.

David Meecham is a partner, and Victoria Douglas is a Legal Director, in the government & public services team at TLT LLP, specialising in public sector real estate.

Conclusion

Local Authorities are no doubt used to being asked to do more with less. This can cause significant strain when applied to delivering vital public services. However, in other areas of operations, from AI adoption to real estate strategy, the principle of doing more with less could breed creative ways for councils to achieve greater financial sustainability.